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Credit cards can offer a financial buffer during tough times, but they're not a universal solution. For instance, paying your rent with a credit card isn't always an option, which might make you consider using a cash advance instead. While this seems like a reasonable choice, it may not be the best decision for your long-term financial health.
A recent analysis from CreditCards.com sheds light on the issue: The site reviewed 100 credit cards and found the average cash advance APR is 24.8%. By contrast, the typical interest rate for regular purchases is 19.84%, which seems much lower.
According to industry expert Ted Rossman from Creditcards.com, a credit card that adjusts interest rates based on your creditworthiness may still offer a single, fixed rate for cash advances.
Is it a better option than a payday loan with sky-high interest rates? Absolutely.
However, the higher interest rate on a cash advance isn't the only cost. You'll also face a fee for withdrawing cash via an ATM or using a convenience check. Rossman notes that the typical fee for a cash advance is either $10 or 5% of the amount, whichever is higher. Additionally, unlike regular credit card purchases, cash advances don’t have a grace period, meaning interest begins to accrue immediately.
Another downside: your credit card company will likely apply your minimum payment toward the lower interest balance first. This means you'll pay off regular purchases before tackling your cash advance, causing the higher interest on the advance to build up. Only if you pay above the minimum will the extra payment go toward the higher-interest balance, Rossman explains.
Here’s an illustration of how a single cash advance can create financial complications, based on the report's example:
Imagine you take out a $1,000 cash advance and plan to pay it off within 30 days. With the typical 5% cash advance fee, that adds $50. Plus, at the average APR of 24.80%, you'd incur about $21 in interest. That's an additional $71 in just one month—and the situation gets much worse if the balance is carried for a longer period.
If you make only the minimum payments on that $1,000 cash advance, you'll remain in debt for over six years and end up paying close to $2,000 in total.
If you're in urgent need of cash, a more affordable alternative would be to approach your local bank or credit union where you have a checking account and inquire about a personal loan.
Securing a loan may be tougher now, as lenders have become more cautious in light of the risks involved with lending money during a global crisis. However, if your relationship with your bank is in good standing, you may have a better chance than seeking a loan from a standalone personal loan provider.
Alternatively, you could ask your creditors if it's possible to break down your debt into manageable installments. Many service providers would rather receive payments over time than risk you not paying at all.
If you decide to go for a credit card cash advance, make sure you have a clear strategy to repay the funds quickly. Taking an advance can be risky, but if it's a short-term fix with a solid, foolproof plan to eliminate that new debt fast, it might help you get through a difficult situation.
